Plunge in Western Canada Select oil price nothing to gloat about; future is at stake

Lack of pipeline capacity depresses oil prices in Alberta

It’s hard to believe that so many people were reacting with glee upon hearing the price of a barrel of Western Canada Select (WCS) oil had dropped below $5 and was approaching $4.18 as of this writing.

It was to the haters of Alberta and the oil sands or fossil fuels in general a portent of things to come, an inevitable tumble on the path to the brave new world of renewables and an electrified future.

Nothing could be further from the truth.

WCS is the price Alberta and Saskatchewan oil producers get for their product. It has always traded lower than oil from other producing regions.

Now, thanks to the oil price war between Russia and Saudi Arabia, the price of all oil has been driven down. West Texas Intermediate is trading at US$20.47, even Brent is trading at $US26.42.

It was not too long ago, 2007 to be precise. that WTI oil was fetching close to US$140 a barrel.

Between the shale oil explosion, OPEC and Russia, the world finds itself awash in oil.

This became problematic when the corona virus pandemic knocked the stuffing out of the global economy and, hence, the demand for oil.

It became the perfect storm – oversupply and low demand.

With WCS trading at these levels, price poses an existential threat. At $5 per barrel, producers cannot make any money. It’s as simple as that.

A good number of people think that the low WCS price reflects the oil’s lack of quality.

Not true. Maya oil is about the same quality as WCS, but it trades for twice the price as the latter.

It is proximity to refineries and the lack of pipeline capacity which depresses WCS. California’s heavy oil (yes California pumps oil) goes for a good price because the refineries are right next door. That’s why Mexican oil commands a good price as well.

With refineries in Montana and on the West Coast at capacity, oil producers here need access to Gulf Coast refineries or East Coast refineries.

That’s why Keystone was and is so important. That’s why TransMountain is so important. That why Northern Gateway (now canceled) was so important. That’s why canceled Energy East was so important.

Those pipelines would have allowed producers to get product to market – the key to lifting the WCS price.

For Canadians who think that the death of the oil industry in Canada is a good thing, they would do well to remember that even if the oilsands disappear, the demand for oil will not.

It is expected to grow up until 2040 and is likely to plateau at that point. Demand for oil will always be there simply because it is extremely hard to find substitutes.

After all, if replacing fossil fuels with renewables were easy, all countries would have no problem meeting their 2030 goals contained in the Paris Climate Agreement. But not one country will meet them.

In other words, prices will recover and if we can get pipelines built, we stand to benefit from meeting that demand. If we don’t produce oil to meet global demand, other countries will.

All this, of course, requires a federal government that is concerned about economic development and is not in the thrall of the climate alarmists.

It is hoped that the current pandemic, which is devastating our economy is a wake up call. We can ill afford to forego any opportunity to bring in foreign currency – not unless we want a 50 cent dollar.

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